What is California state law on prepayment penalties?

Answer 1

California Civil Code Section 2954.9

(a) (1) Except as otherwise provided by statute, where the

original principal obligation is a loan for residential property of

four units or less, the borrower under any note or evidence of

indebtedness secured by a deed of trust or mortgage or any other lien

on real property shall be entitled to prepay the whole or any part

of the balance due, together with accrued interest, at any time.

(2) Nothing in this subdivision shall prevent a borrower from

obligating himself, by an agreement in writing, to pay a prepayment

charge.

(3) This subdivision does not apply during any calendar year to a

bona fide loan secured by a deed of trust or mortgage given back

during such calendar year to the seller by the purchaser on account

of the purchase price if the seller does not take back four or more

such deeds of trust or mortgages during such calendar year. Nothing

in this subdivision shall be construed to prohibit a borrower from

making a prepayment by an agreement in writing with the lender.

(b) Except as otherwise provided in Section 10242.6 of the

Business and Professions Code, the principal and accrued interest on

any loan secured by a mortgage or deed of trust on owner-occupied

residential real property containing only four units or less may be

prepaid in whole or in part at any time but only a prepayment made

within five years of the date of execution of such mortgage or deed

of trust may be subject to a prepayment charge and then solely as

herein set forth. An amount not exceeding 20 percent of the original

principal amount may be prepaid in any 12-month period without

penalty. A prepayment charge may be imposed on any amount prepaid in

any 12-month period in excess of 20 percent of the original principal

amount of the loan which charge shall not exceed an amount equal to

the payment of six months' advance interest on the amount prepaid in

excess of 20 percent of the original principal amount.

(c) Notwithstanding subdivisions (a) and (b), there shall be no

prepayment penalty charged to a borrower under a loan subject to this

section if the residential structure securing the loan has been

damaged to such an extent by a natural disaster for which a state of

emergency is declared by the Governor, pursuant to Chapter 7

(commencing with Section 8550) of Division 1 of Title 2 of the

Government Code, that the residential structure cannot be occupied

and the prepayment is causally related thereto.